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Markets react to escalating tensions in the Middle East
The UK's FTSE 100 index rose modestly on Wednesday morning, defying a third consecutive day of losses in Asian markets as investors grappled with the fallout from the US-Israel conflict with Iran. Energy prices surged amid fears of prolonged disruptions to critical shipping routes.
Energy prices spike amid shipping lane threats
Brent crude climbed 2.5% to $83.96 a barrel, extending a 15% rally since hostilities erupted over the weekend. Gas prices remained volatile, trading at 143p per therm-below Tuesday's peak of 170p but still elevated. Analysts warn the Strait of Hormuz, a chokepoint for a fifth of global oil and gas supplies, faces severe disruptions after Iran threatened to target vessels.
The UK Maritime Trade Operations Centre reported a ship near the UAE was struck by an unidentified projectile on Wednesday. Though no fire broke out and the crew was unharmed, the incident underscored the risks to regional trade.
Asian markets plunge, triggering emergency halts
South Korea's Kospi index suffered its worst drop in decades, closing 12% lower and activating circuit breakers for the first time since August 2024. Trading was suspended for 20 minutes to curb panic selling. Thailand's market also halted trading after an 8% decline.
Japan's Nikkei 225 fell 3.6%, while Hong Kong's Hang Seng lost 2.5%. Analysts attributed the sell-off to Asia's heavy reliance on Middle Eastern energy imports, which must transit the Strait of Hormuz. Jack Lee of China Macro Group noted that export-driven economies like South Korea and Japan are particularly vulnerable to geopolitical shocks.
China's markets, however, showed relative resilience, buffered by alternative energy sources, including Russian oil supplies.
Gold rises as investors seek safe havens
Gold prices edged up to $5,169 in early trading, reflecting demand for safe-haven assets. Lindsay James, investment strategist at Quilter, told the BBC that investors are bracing for a protracted conflict, though she noted current gas prices remain below levels seen during Russia's invasion of Ukraine in 2022.
Western responses and economic fallout
US President Donald Trump announced plans to offer risk insurance to shipping firms operating in the region, vowing to "ensure the free flow of energy to the world." However, experts cautioned that such measures may not fully alleviate industry concerns.
In the UK, Chancellor Rachel Reeves is set to meet North Sea energy executives on Wednesday to assess the conflict's economic impact. The meeting follows her Spring Statement, where the Office for Budget Responsibility (OBR) revised the government's fiscal headroom upward to £23.6bn-though the OBR warned the war could severely disrupt the UK and global economies.
James highlighted risks to UK inflation, suggesting the Bank of England may delay anticipated interest rate cuts. Markets had expected two reductions this year, but inflation remains above the central bank's 2% target. The Bank's next decision is due on 19 March.
"The higher fiscal headrooms were built on lower gilt yields, which are now reversing. This underscores how fragile UK finances remain,"
Lindsay James, Quilter
